PSU Bank story

PSU Bank story It has been all about NPAs and capital shortfalls.

Back in 2008, the performance gap between Indian public sector banks and private sector banks was not large. Over the last 6 years, the private banks have made rapid strides in terms of asset quality, banking efficiency, capital mix and balance sheet adequacy. However, PSU banks have lagged and the latest quarter underscores that this problem is only getting worse. Let me explain!

Bad loans are mounting…

During the last week; of the 10 PSU banks that reported earnings, 7 banks reported NPAs in excess of 5%. BoB saw an 18% jump in NPAs while the NPAs of PNB were well in excess of 6%. In fact, smaller PSU banks like UCO Bank and IOB almost present a scary story. Two factors seem to be responsible. Firstly, the economic downturn has made many of the restructured assets look shaky. Secondly, write-offs in agricultural loans have also been responsible for this trend. If that is the case, the next few quarters may see more pressure.

Shortfall in capital

That is the second major worry for Indian PSU banks. According to rough estimates, Indian PSU banks may require an additional capital infusion of $40 billion in 4 years. This is just to comply with the Basel III norms which kick off in 2019. The GoI has already pumped in close to $10 billion into PSU bank capital in the last 3 years and is likely to pump in another $2 billion in this fiscal before March end.

The government has surely set some additional efficiency criteria in terms of Return on Assets and Return on Equity. But the biggest issue may be that PSU banks in their current form may not be able to sustain much longer.

Restructure PSU banks

It is here that PSU banks need to learn a lesson or two from the private banks. Most private banks had these problems a decade ago and also in 2008. But focus on asset quality, CASA deposits and profitability has helped. PSU banking needs a rethink.

The government is right in forcing PSU banks to shape up. But it will have to go beyond that. Bank management has to be more professional. Some banks are without a CMD and most banks have a shortfall of EDs. That is not acceptable. Secondly, the government needs to take a decision on privatizing banks, sooner rather than later. Disinvestment alone will not help. But above all, they should be treated and allowed to function like businesses. As an ex-banker rightly said, “As long as government uses PSU banks as an effective medium of delivering social welfare programs, PSU banks will continue to suffer”. That may be a difficult decision, but the government will have to bite the bullet!

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